Technical analysis of Major Markets, F/X, and anything that can be traded
This is my diary for trading
Views expressed in this are only for educational purposes. They ARE NOT recommendations to BUY or SELL anything!! ALL comments and criticisms welcome.

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Mood!

Wednesday, February 17, 2010

Divergences

When looking at charts one of the indicators I like to look at is RSI. On it's own it can be difficult to read, a high reading can stay high in an "overbought" situation, especially in a strongly trending up market, and vice versa in a down trend. However if looking at the evolution of PRICE with RSI, many times (NOT ALWAYS) it can be an early warning sign of a top or bottom.

Looking at the AUDUSD 8hr chart below :

basically in an up trending market the price makes a swing high, retraces, the rallies again to a new high, BUT the RSI fails to make a new high, NEGATIVE DIVERGENCE. That is the warning signal, and when price turns down a short trade is possible with a stop above the high.

In a down trend the reverse happens, price makes a new low but RSI fails to make a lower low, POSITIVE DIVERGENCE.

This is just another tool to be used in trying to identify good entry points. I have hand drawn what the next move MAY be in AUDUSD, if it transpires will be initiating a short.